For a company with aggregated turnover of $20 million or more, the R&D tax offset is non-refundable and its rate depends on a single ratio: R&D intensity. This article is for finance leads at larger companies who want to see how the two tiers work on real numbers, and why the company tax rate changes the offset but not the extra benefit.
What R&D intensity is
R&D intensity is the company’s notional R&D deductions for the year divided by its total expenses for the year. Spend $3 million on eligible R&D against total expenses of $50 million and the intensity is 6 per cent. The threshold that matters is 2 per cent.
- R&D spending up to 2 per cent of total expenses earns the company tax rate plus a premium of 8.5 per cent.
- R&D spending above 2 per cent earns the company tax rate plus a premium of 16.5 per cent.
The premium applies to notional R&D deductions of up to $150 million a year. Anything above that earns only the company tax rate.
The tiers worked through
Take a company with total expenses of $50 million for the year, paying tax at 30 per cent. Here is its offset at three levels of R&D spending.
| R&D spending | Intensity | First 2% at 38.5% | The rest at 46.5% | Total offset | Extra over a deduction |
|---|---|---|---|---|---|
| $1,000,000 | 2% | $385,000 | $0 | $385,000 | $85,000 |
| $2,500,000 | 5% | $385,000 | $697,500 | $1,082,500 | $332,500 |
| $5,000,000 | 10% | $385,000 | $1,860,000 | $2,245,000 | $745,000 |
The extra over a deduction is the offset less what an ordinary 30 per cent deduction for the same spending would have been worth. It is the real value of the incentive, and every dollar above the 2 per cent line earns almost twice the premium of the dollars below it.
A base rate entity sees a lower rate and the same benefit
A company with aggregated turnover under $50 million can be a base rate entity, paying tax at 25 per cent. Between $20 million and $50 million that is common, and it lowers both offset rates by five points: 33.5 per cent and 41.5 per cent. Here is the same company at 25 per cent.
| R&D spending | Intensity | Total offset | A 25% deduction | Extra over a deduction |
|---|---|---|---|---|
| $1,000,000 | 2% | $335,000 | $250,000 | $85,000 |
| $2,500,000 | 5% | $957,500 | $625,000 | $332,500 |
| $5,000,000 | 10% | $1,995,000 | $1,250,000 | $745,000 |
The offset is smaller, but the extra benefit is identical, because the premium sits on top of whatever the tax rate is. That is worth knowing before anyone compares two offsets and concludes one company did better.
Where intensity calculations go wrong
- Total expenses taken from the wrong place. The denominator is the company’s total expenses for the income year. For a consolidated group it is the head company’s, which includes every member.
- R&D spending that grows the denominator too. Every dollar of R&D is also a dollar of total expenses, so intensity rises more slowly than the R&D budget.
- Costs left out of the claim. Overheads, contractors and depreciation that belong in the R&D figure push intensity up when they are properly included, and that moves dollars into the higher tier.
Our page on the R&D Tax Incentive for larger companies carries the short version, and the calculator runs your own numbers. Changes announced in the 2026-27 Budget would alter the rates from 1 July 2028, but they are not law yet and do not affect claims being made now. They are set out in the 2026 changes.
Questions we are asked
What is the R&D intensity threshold?
The ATO rule is that R&D intensity is notional R&D deductions divided by total expenses for the income year, and the threshold is 2 per cent. Spending up to 2 per cent earns the company tax rate plus 8.5 per cent, and spending above it earns the company tax rate plus 16.5 per cent.
How much is the non-refundable R&D tax offset worth at 5 per cent intensity?
Prime’s worked example is a company with $50 million of total expenses and $2.5 million of R&D, paying tax at 30 per cent. Its offset is $1,082,500, which is $332,500 more than an ordinary deduction for the same spending.
Does the 25 per cent base rate change the R&D offset?
Under the ATO rules a base rate entity’s offset rates are five points lower, at 33.5 and 41.5 per cent, but the premium on top of the tax rate is unchanged, so the extra benefit over an ordinary deduction is the same.
Is there a cap on the R&D premium?
Yes. The ATO rule is that the premium applies to notional R&D deductions of up to $150 million in an income year, and anything above that earns only the company tax rate.
Checking your own numbers
If your intensity sits near the 2 per cent line, or you are not sure the right costs are in the claim, we can work it through with you before the claim is lodged. Book a time with us.
How we can helpR&D Tax Incentive advisory Eligibility, registration with AusIndustry and the claim itself, prepared with the records a review would ask to see.
